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Economic Highlights

Another day of Bernanke testimony and a slew of earnings reports provide the backdrop for today’s action. The Fed Chairman was largely reassuring in his Wednesday outing and will likely do the same in today’s session. On the earnings front, we are seeing a repeat of what we saw in Q1 – no growth outside of Finance, a predominance of negative revenue surprises, and weak guidance. There may not be much earnings growth, but the overall level of total earnings remains fairly high, with Q2 on track to surpass Q1’s all-time record quarterly earnings total.

Bernanke reiterated the Fed’s position in his House testimony yesterday that the ‘Taper’ decision was data-dependent, not on some ‘pre-set’ timetable, and that the overall tone of monetary policy will need to remain accommodative for a very long time. We will likely see a replay of that position in his Senate testimony today.

The stock market appears to have reconciled to the higher interest rates resulting from the ‘Taper’ talk as long as they reflect an improved economic outlook along the lines of consensus expectations. The consensus view is that U.S. GDP growth will be better in the second half of the year from the first half and next year will be better than this year. The question is what happens to the stock market if the second half of the year turns to be no better than the first half in a backdrop of no Fed QE.
 
This better second-half expectation is reflected in earnings estimates as well, with consensus expectations for the back half of the year reflecting a material ramp up in the growth pace. We will know more about the second half earnings outlook as more companies provide guidance for Q3 and beyond in the ongoing Q2 earnings season. But the results we are seeing thus far don’t inspire much confidence that current expectations for the second half of the year will hold up.

Q2 Earnings Season Update
 
Including this morning’s reports from Verizon (
(VZ - Analyst Report)), Morgan Stanley ((MS - Analyst Report)), UnitedHealth ((UNH - Analyst Report)) and others, we now have 2013 Q2 reports from 76 S&P 500 companies that combined account for 23% of the index’s total market capitalization. The Finance sector is heavily represented in these early reports, with Q2 results from 48.5% of the sector’s total market capitalization already known.
 
Finance sector results have been very good, but the performance outside of Finance isn’t that bad either. Looking at the results for the 23% of market capitalization that have come out as of this morning, a couple of things stand out. First, as was the case in Q1, revenues are weak, with few companies beating on the top lines. Second, the overall tone of management guidance remains on the weak side at this admittedly early stage, which means that estimates for Q3 (currently at +4.6%) will need to come down. Third, the overall level of earnings is on track to surpass 2013 Q1’s all-time record; we may not have much growth, but total earnings remain at record levels.

In terms of Q2 Scorecard, total earnings for the 76 S&P 500 companies that have reported results as of this morning are up +11.8% from the same period last year, with 63.2% beating earnings expectations. On the revenue side, we have a growth rate of +5% and 40.8% of the companies are coming ahead of top-line expectations. The earnings and revenue growth rates seen thus far are broadly in-line with what we have seen from the same group of 76 companies in recent quarters, though the revenue beat ratio is running a bit weaker than the first quarter’s very low level.
 
There is not much growth outside of Finance, with the composite Q2 earnings growth rate for the S&P 500 (combining the 76 reports that have come out with the 424 still to come) currently at +1.6%. Excluding Finance, the composite Q2 earnings growth for the S&P 500 drops to a decline -3.5%. The Technology sector is a big drag on earnings growth, with total earnings for the sector expected to be down -7.8%. We will know more about the sector’s earnings picture with today’s results from Google (
) and Microsoft ((MSFT - Analyst Report)) after the close, though Wednesday’s Intel ((INTC - Analyst Report)) report doesn’t provide a reassuring read-through for Microsoft.

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